Isle mortgage broker facing court hearing on bankruptcy

Company’s owners owe as much as $10M to creditors

January 20, 2013

The husband-and-wife duo behind a one-time prominent Maui mortgage brokerage is seeking personal Chapter 11 bankruptcy protection, listing between 100 and 199 creditors owed between $1 million and $10 million in estimated liabilities.

In a joint bankruptcy filing, Kathleen Patricia Morris - also known as Tricia Morris - and David Duffy Herman describe their debts as "primarily business debts" tied to their Kihei-based company Hawaii's Premiere Mortgage Co., including unpaid mortgages and loans against more than two dozen properties in Hawaii and Idaho.

The couple's voluntary petition requires only an estimated range of creditors, assets and liabilities.

Court and other legal documents show that Morris would broker short-term loans to borrowers using money from private individuals. The loans would be secured by real estate, often with multiple mortgages stacked against a single property.

A listing of Morris' and Herman's creditors holding the 20 largest unsecured claims shows bank loans, credit cards balances, deficiency judgments and money owed on multiple residences on Maui and the Big Island totaling more than $5.9 million, according to bankruptcy court documents.

A submitted reorganization plan proposes paying the first mortgagees or most senior secured creditors on 26 different properties - including 19 on Maui - monthly payments at 3.5 percent interest over 20 years.

Multiple creditors have objected to the proposed plan, according to court documents.

A continued court hearing on whether or not to confirm the couple's disclosure statement - the first step in finalizing a reorganization plan - is scheduled for Tuesday in Honolulu.

The Office of the U.S. Trustee, a watchdog for the bankruptcy process, is asking the court to either convert the case to a Chapter 7 bankruptcy, which would trigger a liquidation of assets to pay off creditors, or, alternatively, to dismiss the Chapter 11 filing.

Morris and Herman listed assets estimated at between $1 million and $10 million in their bankruptcy filing, however they both are listed as the "fee owners" of at least 15 Maui properties with a combined assessed tax value of more than $14.5 million, according to Maui County property tax records.

"This case should be converted to Chapter 7 or dismissed for several reasons," Acting U.S. Trustee Tiffany Carroll wrote in a Dec. 28 motion. "The debtors have demonstrated gross mismanagement of their estate and have not provided information reasonably requested by the U.S. Trustee."

Carroll argues in the motion that Morris and Herman have concealed assets, failed to disclose bank accounts, diverted "substantial amounts" of rental income into a business account they claimed was inactive, and improperly solicited votes on their reorganization plan prior to court approval.

"They have not been forthright in their dealings with the court and creditors. . . . Under the circumstances, the debtors' many actions have violated the letter and spirit of the Bankruptcy Code and demonstrate that they cannot be relied upon to fulfill their fiduciary responsibilities," Carroll wrote.

The U.S. Trustee's Honolulu office declined further comment on the case.

A hearing on the request to convert or dismiss the case also is scheduled for Tuesday.

Attorneys for Morris and Herman said they received an "unprecedented" number of objections to the couple's disclosure statement and asked the court to continue a Jan. 14 hearing until Tuesday.

"While the debtors and their counsel have attempted to respond to the specific objections and issues raised in the 21 objections, an unprecedented amount for individual Chapter 11, it has been impossible to address each and every objection or issue in an adequate fashion," the attorneys wrote in a Jan. 8 filing. "This case, with respect to the number of properties, the amount involved, and the priority issues make this disclosure statement and plan particularly complex."

The Honolulu attorneys for Morris and Herman did not immediately return calls or emails seeking comment.

Morris, who's held a mortgage solicitor's license in Hawaii since 1986, is described on her company's website as having closed more than $2 billion worth of loans in Hawaii. At one time she would frequently advertise services on cable television and in the newspaper.

The couple said in court statements that their "finances suffered" after Herman suffered a heart attack in Idaho in 2009. They initially filed for bankruptcy protection in Idaho, but the case has since been transferred to Hawaii.

"The second year after the medical emergency, Morris attempted to reorganize their debt and obtain hardship loan modifications. She was also dealing with numerous foreclosures and legal issues," the couple's Chapter 11 disclosure statement said.

Morris and Herman are named in more than a dozen state civil lawsuits, including ones filed by condo owner associations and banks, according to court documents. They also have pending nonjudicial foreclosure cases against four of their Maui properties.

"These legal and health issues along with the declining economy and home values caused a dramatic decline in net worth and income," the disclosure statement said. "Debtors' income declined approximately 80 percent during this period. Property values declined 50 percent, wiping out about $12 million of net worth."

The couple said in court statements that to help fund their proposed reorganization plan, their company, Hawaii's Premiere Mortgage Co., "is operating as a mortgage broker and is expanding operations to become more profitable."

In fact, the mortgage broker license for Herman-Morris Enterprises Inc. - doing business as Hawaii's Premiere Mortgage Co. - and Morris' mortgage solicitor license were both revoked by the state in December. Morris does still, however, hold a state mortgage loan originator license with CrossCountry Mortgage of an Ohio business address.

Calls to a phone number for Hawaii's Premiere Mortgage Co. were not returned. The registered trade name for the business expired in October, according to state business records.

In a Friday court filing, attorneys for Morris and Herman amended the couple's disclosure statement, noting that Morris has since been informed that her mortgage broker's license was revoked.

"The amended disclosure statement will reflect the change of the status, that Ms. Morris is no longer a licensed mortgage broker . . . but will be employee as a nonoriginating branch manager of CrossCountry Mortgage Inc.," the attorneys wrote.

Not mentioned in the filing is that revocation of the licenses was the result of an investigation by the state Department of Commerce and Consumer Affairs' Regulated Industries Complaints Office.

A hearings officer issued a report in November recommending both licenses be revoked, citing eight violations of the section of Hawaii Revised Statutes governing mortgage brokers and solicitors, and the Uniform Professional and Vocational Licensing Act.

The so-called findings of fact in the hearings officer's report cites examples of transactions Morris brokered in which private individual lenders testified that they were lied to or misled.

In one example, a private lender said that between 2005 and 2009 he financed about 20 loans totaling $810,000 that were arranged and brokered through Morris to various individual borrowers. He said there were no problems with the loans initially.

But in 2008, Morris brokered a $50,000 loan to an individual that was secured by the borrower's Pukalani residence.

The private lender testified that he received and approved copies of a promissory note, mortgage and other signed documents through Morris.

When interest payments on the loan stopped a few months into the agreement, the lender said he contacted Morris, who agreed to pay the interest and the remaining principal on the $50,000 loan. To date, she has paid $26,000 of the principal, according to the investigator's report.

When that borrower was contacted during the state's investigation, he "denied consenting, agreeing or knowing about a $50,000 loan to him brokered through (Morris)" and "denied receiving $50,000, and never consented to (Morris') use of his name or former Pukalani property," the report said.

Morris' explanation of the incident, according to the report, was that the transaction was handled by employees of her company who were "subsequently fired because she found 'irregularities.' '' Morris also explained that she "had a part-time accountant at that time that 'caused problems.' ''

In another example, an individual lender in 2008 financed a $70,000 short-term loan brokered through Morris, which was secured by the borrower's Kihei property on Kanakanui Road.

Only part of the mortgage was recorded with the state's Bureau of Conveyances, the investigation found.

The lender testified that Morris represented to him that the Kihei property was the borrower's personal residence in Maui Meadows and that the loan was for a kitchen remodel. The property turned out to be a vacant lot in a ravine, and when interest payments stopped, the borrower offered the lender to instead take or sell the lot.

Morris' explanation of the discrepancy was that she told the lender the loan was going to be used for a kitchen remodel, but that the lien would be on a different property. She argued that the vacant lot had enough equity at the time to cover the $70,000 loan.

Morris also testified that "Kanakanui Road is a well known road (and) people familiar with Maui would know that Kanakanui Road is not in Maui Meadows." According to the report, she said she "never told (the lender) that she guaranteed the loans, but that she would try to make sure that he was repaid."

Penalty fines were not suggested by the Regulated Industries Complaints Office in light of the bankruptcy case.

Hawaii DCCA Director Kealii Lopez agreed with the recommendations and issued a final order Dec. 24 to revoke the licenses.

A state official said no action has been taken against Morris' separate and active license as a mortgage loan originator.

Issuance of the licenses was transferred at the start of 2011 to the DCCA's Division of Financial Institutions. She obtained a mortgage loan originator license in May 2011, six months before the Regulated Industries Complaints Office began its investigation into her other license.

Morris' revoked mortgage broker license had been issued by the Professional and Vocational Licensing division in 1986.

An official with the Division of Financial Institutions said it would need to do its own investigation to determine if there is any misconduct for the active license for Morris.